It only took a jury a few hours of deliberation to give Mark Cuban, the outspoken businessman and owner of the Dallas Mavericks basketball team, a decisive victory over the U.S. Securities and Exchange Commission (SEC), finding that Cuban had not committed insider trading.
Cuban's victory gave yet another black eye to the SEC's courtroom win-loss record at a time when new SEC Chair Mary Jo White has been touting the agency's enforcement initiative. Of course, that initiative is hobbled if potential defendants don't have to fear facing the SEC in court or letting a jury hear the case.
Background
The three-week trial in SEC v. Cuban stemmed from Cuban's role as the largest shareholder in Mamma.com, a Montreal-based Internet search engine company. In 2004, Mamma.com chief executive Guy Faure spoke to Cuban about the company's plan to raise capital through a PIPE (private investment in public equity) offering which could dilute the value of Cuban's shares. While Faure claims Cuban gave verbal assurances that he wouldn't use this information to sell his stock, Cuban's defense team said no such assurances were made. Cuban sold his stock, avoiding a loss estimated at $700,000.
The SEC filed an insider trading complaint against Cuban, but the U.S. District Court for the Northern District of Texas dismissed it. The SEC appealed to the U.S. Court of Appeals for the Fifth Circuit, which reversed the dismissal and allowed the case to go to trial. And that's where it all went wrong for the SEC.
Before the jury, the SEC described Cuban's actions as "downright illegal" and stemming from Cuban's "desire to win"--essentially laying out an open-and-shut insider trading case. The relative ease with which these charges were undone, however, underscored the nuanced, gray areas of insider trading as well as the SEC's continued difficulty in proving its allegations to jurors.
Dueling Experts
Dueling expert witnesses haggled over the definitions of some aspects of insider trading and the burden of proof the SEC needed to reach. Some experts contended that Cuban's promise--explicit or not--to keep news of the PIPES offering to himself also banned him from selling the stock. Other experts contended the two were unrelated. And besides, as defense witness Erik Sirri, the SEC's former Director of the Division of Trading and Market argued, the news of the PIPES offering was already in the public sphere and thus was no longer privileged information.
This back and forth may have muddied the clear delineation of insider trading activity the SEC wanted to attribute to Cuban, but the agency's inability to produce the live testimony of their key witness, Mamma.com CEO Faure, instead relying on a videotaped presentation, no doubt hurt the agency's credibility in the jury's eyes.
And that is the bigger problem right now for the SEC, which still smarting from recent courtroom losses in two big market crisis cases--against Bruce Bent and his Primary Reserve Fund, and against a former director of Citigroup's collateralized debt obligation (CDO) structuring group. (Of course, the SEC did notch a courtroom victory over former Goldman Sachs employee Fabrice Touree. And most recently, the SEC secured two favorable verdicts, albeit in small potatoes cases. The wins came from juries in Minnesota and Tennessee in separate offering fraud cases brought against True North Finance Corp. and AIC, Inc., respectively.)
Of course, a low win-rate in recent high-profile jury trials is unlikely to strike fear in the hearts of potential defendants, making them think that it may be wiser to hold off on settlement and roll the dice with a jury and the SEC's courtroom prowess.
*article courtesy of Gregg Wirth and West LegalEdcenter's Wall Street Lawyer - Securities in the Electronic Age.